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Revisions in Utilization-Adjusted TFP and Robust Identification of News Shocks

Author

Listed:
  • Eric Sims

    (University of Notre Dame)

  • Andre Kurmann

    (Drexel University)

Abstract

This paper documents large revisions in a widely-used series of utilization-adjusted total factor productivity (TFP) by Fernald (2014) and shows that these revisions can materially affect empirical conclusions about the macroeconomic effects of news shocks. The results suggest that for all its improvements over a traditional Solow residual, Fernald's measure of technology may be confounded by systematic measurement error, potentially invalidating the main identifying restriction of the literature that productivity reacts to a news shock only with a lag. Building on the large empirical literature documenting the slow diffusion of new technologies, we propose an alternative identification that does not rely on this zero impact restriction and instead accounts for most of the unpredictable variation in TFP at long horizons. We interpret the resulting shock as news because it predicts sustained future productivity growth while simultaneously generating a strong impact response of technological innovation indicators and forward-looking information variables. The identification is robust to different measurement issues, including the revisions in Fernald's TFP series, and to whether news affects (true) productivity with a lag or not. When applied to U.S. data, the shock fails to generate comovement in the main macro aggregates and therefore does not constitute a main source of business cycle fluctuations. The shock nevertheless accounts for a large part of macroeconomic fluctuations at medium and longer horizons and generates sharp impact responses of inflation and asset prices.

Suggested Citation

  • Eric Sims & Andre Kurmann, 2017. "Revisions in Utilization-Adjusted TFP and Robust Identification of News Shocks," 2017 Meeting Papers 90, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:90
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    References listed on IDEAS

    as
    1. Andr? Kurmann & Elmar Mertens, 2014. "Stock Prices, News, and Economic Fluctuations: Comment," American Economic Review, American Economic Association, vol. 104(4), pages 1439-1445, April.
    2. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-2632, October.
    3. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    5. Julio J. Rotemberg, 2003. "Stochastic Technical Progress, Smooth Trends, and Nearly Distinct Business Cycles," American Economic Review, American Economic Association, vol. 93(5), pages 1543-1559, December.
    6. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    7. Eric R. Sims, 2016. "Differences in Quarterly Utilization-Adjusted TFP by Vintage, with an Application to News Shocks," NBER Working Papers 22154, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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